Question

5.)Gallerani Corporation has received a request for a special order of 5,600 units of product A90 for $27.50 each. Product A90's unit product cost is $27.25, determined as follows:

Direct materials	$	2.85
Direct labor		8.15
Variable manufacturing overhead		7.25
Fixed manufacturing overhead		9.00
Unit product cost	$	27.25

Assume that direct labor is a variable cost. The special order would have no effect on the company's total fixed manufacturing overhead costs. The customer would like modifications made to product A90 that would increase the variable costs by $3.90 per unit and that would require an investment of $28,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales. The company has ample spare capacity for producing the special order. The annual financial advantage (disadvantage) for the company as a result of accepting this special order should be:

7.)

Bruce Corporation makes four products in a single facility. These products have the following unit product costs:

	Products
	A		B		C		D
Direct materials	$	16.70	$	20.60	$	13.60	$	16.30
Direct labor		18.70		22.10		16.50		10.50
Variable manufacturing overhead		5.50		6.70		9.20		6.20
Fixed manufacturing overhead		28.60		15.50		15.60		17.60
Unit product cost		69.50		64.90		54.90		50.60

Additional data concerning these products are listed below.

	Products
	A		B		C		D
Grinding minutes per unit		2.00		1.05		0.60		0.90
Selling price per unit	$	84.20	$	76.60	$	73.40	$	68.10
Variable selling cost per unit	$	2.45	$	3.15	$	3.90	$	4.60
Monthly demand in units	4,100		3,100		3,100		5,100

The grinding machines are potentially the constraint in the production facility. A total of 10,500 minutes are available per month on these machines.

Direct labor is a variable cost in this company.

Which product makes the MOST profitable use of the grinding machines? (

Answer 1

5
	Per unit	Total 5600 units
Incremental revenue	27.5	154000
Incremental costs:
Direct materials	2.85	15960
Direct labor	8.15	45640
Variable manufacturing overhead	7.25	40600
Increase in variable costs	3.90	21840
Purchase of special tool		28000
Total Incremental costs		152040
Incremental net operating income(loss)		1960
Financial advantage $1960
7
	A	B	C	D
Selling price per unit	84.20	76.60	73.40	68.10
Less: Variable costs
Direct materials	16.70	20.60	13.60	16.30
Direct labor	18.70	22.10	16.50	10.50
Variable manufacturing overhead	5.50	6.70	9.20	6.20
Variable selling cost per unit	2.45	3.15	3.90	4.60
Total variable costs	43.35	52.55	43.20	37.60
Unit contribution margin	40.85	24.05	30.20	30.50
Grinding minutes per unit	2.00	1.05	0.60	0.90
Contribution margin per Grinding minute	20.43	22.90	50.33	33.89
Product C makes the MOST profitable use of the grinding machines